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FUSION

How Price Fluctuations Made America

By Samuel Gregg


To an extent unrivalled by any other country, America has been defined by its economy and economic success. When Alexis de Tocqueville visited the young republic for ten months in 1831 and 1832, he immediately noticed the extraordinary degree to which Americans were preoccupied by their economic circumstances. A “spirit of enterprise,” he commented, dominated American society in a way quite unlike any other nation that Tocqueville knew.

  Economic conditions—and sudden changes in those settings—have also exercised profound influences upon American politics and government. To many, that is obvious. Less obvious, however, is how major economic upheavals have tended to produce haphazard adaptations in American politics. Sometimes these messy modifications end up becoming permanent features of America’s institutional landscape.

  That is the thesis underlying Carola Binder’s new book Shock Values: Prices and Inflation in American Democracy (2024). A professor of economics at Haverford College, Binder has written widely on topics ranging from monetary policy to how central banks signal their intentions to the rest of us. Now, however, Binder has authored a book which argues that if we want to understand some of America’s most contentious debates as well as major reinventions of the Federal Government, we need to grasp the effects of sudden price fluctuations on the American body politic from the republic’s beginnings.

  Drawing upon economics and monetary theory, but also history, political science, and legal thought, Binder’s primary objective is not to make her own policy recommendations. Though she does make specific suggestions in the concluding chapter, Binder’s main goal is “to equip readers with and without formal economics training to think more deeply about what alternative approaches to price stabilization might mean, not just for the economy but for the social and economic system.” In my estimation, Binder succeeds admirably, not least by forcing readers to confront the different and sometimes painful tradeoffs associated with varying policies and institutional options.

 

A Conflicted History

Binder begins by reminding us that American history is regularly read through a series of longstanding and never quite resolved dichotomies: the desire for liberty versus the need for security; liberal constitutionalism against surging populist sentiment; urban contra rural; the unending battle between free traders and economic nationalists, to name just a few. These and other divisions, she argues, “have shaped the struggle to find a legitimate role for the state in managing and stabilizing prices.”

  Whatever role ends up being played by governments in areas like the money supply or prices, the issue of intervention and therefore state coercion invariably rears its head. In many ways, the scope given to market economies is heavily defined by the extent that the state allows free prices to coordinate information and exchanges or, conversely, seeks to manipulate or even suppress market signals through decree or legislation.

  By definition, price controls involve the use of state power to impose a price level different to what would otherwise be delivered by markets. Whether formally stated or not, such interventions are backed up by the state’s willingness to use coercion to maintain these controls in place. An associated issue is the extent to which citizens accept such coercion-supported interventions into market exchanges as legitimate exercises of state power.

  The debates covered in the historical periods analyzed in Binder’s book are shown to be defined heavily by the degree of coercion to which Americans are willing to assent if the impact of price shocks is to be overcome. A sizable number of otherwise liberty-loving Americans, Binder shows, have not been shy about looking to government power to remedy the fall-out of inflationary outbreaks or booms and busts, and to try and prevent such things from ever happening again.

  Those same Americans, however, are often very dissatisfied with the institutional reordering that follows such crises. Once a shock has passed, Americans start questioning the wisdom of measures that seemed self-evident at the time but look far less compelling a year or so later. One example highlighted by Binder is the imposition of price controls by President Richard Nixon in 1971 as stagflation gripped the U.S. economy. Initially, Nixon’s move was popular. Yet by the time Nixon resigned two years later, Binder observes, price controls had largely lost public support in the wake of growing inflation. Their legitimacy as a policy option subsequently evaporated.

  A further complication highlighted by Binder is the fact that interest groups line up on different sides concerning the policies that governments should adopt towards price fluctuations. In the 1790s, Binder points out, “Debates about the new nation’s monetary and banking institutions reflected the concern that price fluctuations could exacerbate tensions between agrarian and industrial interests.”

  This pattern of ongoing clashes manifests itself as Binder takes us from the late-eighteenth century as the young republic wrestled with creating new monetary arrangements politically designed to bind the states together, all the way through to the COVID-19 Pandemic in 2020. Time after time, we see economic interests and even entire regions of the country setting themselves against each other as booms and busts bolster or depress different economic sectors. In the midst of the back-and-forth, presidents, legislators, and economic thinkers struggle to reconcile these pressures with their own political agendas, their economic convictions, and—occasionally—a sense of what might even be in the nation’s best long-term interest.

 

Technocracy in America

 The end-result of this wrangling has never been a neat set of monetary institutions characterized by organizational harmony, defined objectives, and unambiguous lines of responsibility. More often than not, disharmony, ambiguity, and decidedly limited forms of transparency has prevailed. This has been further complicated by the growth of another friction that accelerated with the establishment of the Federal Reserve System on December 23, 1913. That tension is, in Binder’s words, between “balancing technocratic discretion with democratic accountability.”

  Managing this type of conflict is not new. On the one hand, even some very populist thinkers recognize that not all areas of public policy should be subject to the vagaries of constantly shifting and unstable majorities or the ups-and-downs of opinion polls. Putting certain things beyond the popular will is one of the points of liberal constitutionalism. Nonetheless, questions of legitimacy in democratic systems—which Binder understands (drawing on former central banker Sir Paul Tucker) as the citizenry’s readiness to accept the authority of state institutions—are bound to arise when more and more political authorities start functioning in ways that indicate an indifference (and even antagonism) towards democratic norms.

  Modern central banks in America and the Western world are one set of institutions that exemplify this conflict. Since the late-1980s, they have acquired more autonomy from the whims of elected officials. If central banks are to conduct monetary policy and deal with the price fluctuations associated with inflation or economic shocks in a manner that transcends sectional interests, the argument goes, they need insulation from such influences.

  But what happens when, as it sometimes turns out, the decisions made by these monetary institutions are wrong? Or if their decisions have unanticipated effects that negatively affect the country as a whole or specific demographic segments made up of millions of people? And what if these developments transpire in a context whereby other powerful political institutions are increasingly resorting to measures like executive orders and emergency powers because of an inability or disinclination to secure sufficient political support to realize specific goals?

  The overall result, Binder illustrates, is growing distrust of technocratic institutions as well as political authority more generally. If left unchecked or unresolved, it creates a steadily unfolding crisis of legitimacy for a democratic polity that, ironically enough, threatens to strip institutions that genuinely need considerable independence to fulfill their responsibilities of that necessary protection.

 

Ideas over Power

One might initially conclude from this that Binder’s portrayal of the interplay between price fluctuations, politics, and economic policy indicates that principles or carefully worked out economic or monetary theories have played thoroughly backstage roles throughout the entire process. That, however, would be a mistake. In her survey of the back-and-forth of the struggle between vested interests, bureaucrats, and politicians uninterested in good long-term policy outcomes, Binder shows that, at different stages, ideas have had important impacts—for better and for worse.

  What Binder calls “the long road to inflation targeting in the United States” did not spring ex nihilo from the minds of central bankers in the late-1980s. The Yale economist Irving Fisher (1867-1947)—a progressive rather than a conservative—worked for years on the subject of price stabilization long before the Federal Reserve was created. Fisher did not confine his efforts to books and journals; he became actively involved in educating legislators and even lobbying them to promote measures that he thought would achieve his desired outcome.

  From this point on, Binder shows how intellectuals seeking to have similar ideas integrated into the conduct of monetary policy worked, albeit with varying levels of intensity, to achieve the goal of a price stabilization mandate for a monetary authority. The path, Binder notes, was by no means a straight one. At the same time, the persistence with which this objective was pursued, often in extremely unfavorable conditions, shows that ideas can gradually be effective. That said, she also demonstrates that this outcome was by no means inevitable, let alone fully attained. After all, the Fed has had a dual mandate since 1971, and that duality means that those who favor the primacy of price stability have yet to achieve their desired end.

 

Know One’s Context, Know One’s Possibilities

Binder herself concludes that “a single and clearly defined target for monetary policy, something like a [Nominal GDP] level target” is the best way forward for managing price fluctuations and diminishing the risks of shocks. Part of her reasoning is that, of all the politically feasible options available, it has the greater chance of success. Moreover, Binder specifies, a focused mandate would also help establish greater accountability by reducing technocratic discretion. That, she maintains, would diminish opportunities for people to try and use the Fed’s considerable powers “to achieve a variety of policy goals that are better left to the political process.”

  Binder cautions that this “would not be a panacea, either for the economy or for American democracy.” She is also aware that people across the spectrum of political and economic opinion will take issue with her preferred position.

  The enduring strength of this book, however, is that Binder’s journey across American history provides readers with three contexts that will help the expert and everyman alike make better judgments about the best way forward. The first context is the lessons to be drawn from the American experience with such matters. The second is the battle of ideas and why particular ideas successfully shape policy while others do not. Lastly, there is the pressing context of how we reconcile economic and monetary expertise and the institutions that bestow great powers on such people, with the demands of democratic legitimacy.

  Navigating the last of these contexts, I would suggest, is likely to be the most difficult challenge of all.

 

Samuel Gregg is Friedrich Hayek Chair in Economics and Economic History at the American Institute for Economic Research.

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